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Subject:  Earnings Power Scorecard Date:  11/24/2006  1:25 PM
Author:  hheiserman Number:  1210 of 1817

(From a post on the Complete Growth Investor website...)

Forbes last month profiled a money manager who has consistently beaten the market over the last several years. (I can't recall the manager's name or the issue.) One of the reasons why the manager thinks he has done so well is because he scores each company he owns or is thinking of buying on a matrix of quantitative and qualitative factors.

I have been meaning to create this type of scorecard for awhile, and the article nudged me to do it.

So here is my list. I am in the midst of scoring the companies I own, and maybe you will want to do the same.

I have not backtested my Earnings Power Scorecard, so I may give too much weight to some factors, and not enough weight to others. Also, I reserve the right to amend this list.

Below you will find the items I think are hallmarks of conservative growth stocks, as well as points for each. In theory, a company can earn 165 points in this model, although 50-60 points is pretty darn good.

If you have any high scorers, please share with the rest of us. And if you want a free copy of my spreadsheet, send me an e-mail.


1. Authentic Earnings Power:
Upper-right box (4 of last 5 years)* 10
Earnings Power Staircase (3 of last 5 years)* 10

Net cash (Q) (exc. operating leases) 5
Debt repayment period < 3 years (Q) 5
Return on capital > 20% (3YA) 5
Return incremental capital > 20% (3YA) 5
Book value 5-year CAGR > 10% 5
Sales growth > 10% YOY (Q) 5
Dividend growth > 25% last 5 years (Y) 5
Forecasted 5-year growth > 15% per annum 5

2. Durable Competitive Advantage**:

Low-cost producer 10
High switching costs 10
Intangibles 10
Network effect 10

Industry converging to a few dominant winners? 5
Company has pricing power 5
Repeat purchases ("razor-blade") 5
Insiders ownership > 10% 5
Share count down 10% last 5 years (Y) 5
Market share leader 5
Customers to right of demographic curve? 5

3. Discount to Intrinsic Value:

EV/eFCF < 10x or EV/EBITDA < 5x 10
Maximum pric-intrinsic value of 65% 10

Catalyst 10

**See Morningstar
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